The stock market downturn has led to a significant reshuffling of the Russell 2000 Index, loading the benchmark with the smallest companies it has seen since 1993.
Russell 2000 loaded with smallest companies in years
The stock market downturn has led to a significant reshuffling of the Russell 2000 Index, loading the benchmark with the smallest companies it has seen since 1993.
According to an analysis of the index by Ernst & Young LLP, the market capitalization threshold for entry into the Russell 2000 during the annual reconstitution in June was $78 million —which is less than half the 2008 threshold of $167 million.
At this point, 562 companies in the index have market caps below $167 million, and 326 new companies were added to the index this year.
The lower threshold essentially adds up to new investment opportunities, because inclusion in an index can mean broader exposure among more institutional investors and equity analysts, enhanced liquidity and an opportunity to raise capital.
“The key now will be to impress investors by delivering sustainable growth, outperforming their peers and creating a growth trajectory that is aligned with, or exceeds, the overall market trajectory,” said Maria Pinelli, director in strategic-growth markets at Ernst & Young.
The average market cap of companies in the index is $432 million, down 38% from a year ago.
The median market cap declined by 41% to $305 million.
The index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure that larger stocks do not distort the performance and characteristics of the small-cap universe.
The Russell 2000 is a subset of the Russell 3000 Index, representing approximately 8% of the total market cap of that index.
The Russell 2000 includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
“The lower threshold is truly a sign of the damage inflicted on companies and the overall market,” Ms. Pinelli said. “It also has created an opportunity for smaller companies to gain enormously valuable exposure before a new, larger investor base.”
However, should a market recovery drive the minimum market cap threshold back up, smaller companies now enjoying these benefits will have to accelerate their growth in order to make it again in 2010.
